A Shift In European Sentiment - Is Germany Prepared To Let Greece Default?

Something quite notable has shifted in recent weeks in Europe, and it originates at the European paymaster - Germany. While in the past it was of utmost importance to define any Greek default as voluntary (if one even dared whisper about it), and that the money allocated to keep the Eurozone whole would be virtually limitless, this is no longer the case. In fact, reading between the headlines in the past week, it becomes increasingly obvious that Greece will very soon become a new Lehman, i.e., a case study where the leaders are overly confident they can predict the outcomes of letting a critical entity default, and manage the consequences. Alas, this only proves they have learned nothing from the Lehman case, and the aftermath is still not only unpredictable but uncontrollable. But that's a bridge that Europe will cross very shortly. And what is truly frightening is that this crossing may happen even before the next LTRO hits the banks' balance sheets, thus not affording Euro banks with sufficient capital to withstand the capital outflow and funds the unexpected. In the meantime, here is UBS summarizing the palpable change in European outlook over Greece, and over the entire "Firewall" protocol.

The German government seems uneasy about the firewall discussion. Some German media recently carried stories that a 'super rescue umbrella' would be agreed at the next summit on 1 March, amounting to €1.5 trillion, a number arrived at by adding up the €500bn of the ESM, the €440bn of the EFSF (though only about €250bn remain available) and the $500bn that managing director Lagarde has been seeking in additional financing for the IMF. There is a sense that trying to impress the market with a large number may once again backfire as analysts would quickly shoot down in any such attempt, for example by arguing that the IMF money would not actually be earmarked for the Eurozone, or more seriously maybe, that countries such as Spain and quite possibly France may come to be seen as unable to contribute ever more rescue funds. Instead, it is felt that the preferable option may be to point out that the ESM will be a much better designed and effective instrument than the EFSF, and that €500bn is enough for the problems at hand.

One gets the sense that the German government is not a priori unwilling to commit more financing to crisis management, but not now and only if it becomes clear that really the existing funds are insufficient. Also, there is a view that the government may at times have listened too much to advice from market sides, which then led to initial positions that subsequently needed to be revised. For example, bank recapitalisation was mentioned as something that ultimately seems to have done more harm than good and is now widely criticised for accelerating deleveraging. Also, the insistence that any Greek restructuring had to be 'voluntary' initially stemmed from fear of upsetting markets, but has now come to be criticised as having serious adverse implications such as undermining the sovereign CDS market. As a result, the German government may now be more inclined to stay firm on the firewall discussion and insist that €500bn for the ESM is sufficient for now.

While this step was inevitable from the beginning, what also was inevitable was the fact that leaders would be forced to exude confidence over what happens next. The truth is that they have no idea. Because if Paulson was proven 100% wrong in under 5 days following the Lehman default, when the money markets broke and the Fed has to literally force a bailout of the global financial system, what can one say about two bit second tier politicians from Europe, who have never even seen a DCF model?

ZH... "it becomes increasingly obvious that Greece will very soon become a new Lehman, i.e., a case study where the leaders are overly confident they can predict the outcomes of letting a critical entity default, and manage the consequences."

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The unwind of Lehman is ongoing with no estimate of completion.

Lest we forget, Kyle Bass was on ZH a short time ago and predicted that the holders of Greek debt will experience a 100% loss.

I stand corrected. In any comment I ever make G, please know that if I'm pointing a finger at you guys, I have 4 pointed at the US. I am not a random Euro basher for bashing's sake. I make fun of everyone equally (including my self).

You guys did have Bunga Bunga at your parties, but I guess you need Barney Frankfurter to put together your "events." Barney has arranged for events with Fannie and Freddie...

What planet do you live on Ghordius? Eurocrats cost a fortune to maintain. Van Rompuy earns more than the president of the USA! Case in point. They drive the freakin' parliament to Strasbourg where they have another one every month just to satisfy the vanity of the French! It's a joke. Always was and always will be. Thankfully not for much longer. Bring it on and let's start again.

Think about endlessly nurturing a Greek state in which more than 80% of its population do -at least in part- not pay their taxes.

You cannot ask a German taxpayer to do that! If the Greek hate their country that much, why should others care?

And why now? Because LTRO's have refinanced European banks sufficiently and contagion risks from Greece have become minimal. The ball was thrown back into Greek hands. The only problem is, that the Greek are to slow to realise that their affairs don't matter much anymore.... ;-)

Write downs have been applied to all Greek positions to a great extent (somewhere in the 90% area) already and much faster than anticipated in spring 2011, so its become cheaper to let them go now and I'd happily join those you enjoy saying: Bye bye!

If you believe that who is elected in the US, or Greece, has any bearing on the quality of leadership received in Greece, or the US, then the silicone implants in you're avatar have more brains than you do.

Regardless of who is elected, with the possible exception of Ron Paul, the bankers will still be pulling the strings in DC.

...and, it is not 'coming near me', it's already here and has been for a very long time.

Yup, not to mention s&p @ ~1400....... The idea is, will the LTRO, the latest QE3 anticipation rally and the soar ears of everyone from hearing about an imminent Greek default be enough. Or will the Politicians be wrong again and let Greece go only to scramble to hold up the other PIIGS up at any cost. ...

Letting greece default is the worst outcome, its not bullish at all, thats why they have been desperately trying to avoid a default... especially as the market gorged on th elatest LTRO with the junkiest of collateral that would result in one mother of a margin call when the collatral loses value due to a sovereign shock or cds daisy chain...grab the popcorn and watch the sideshow unfold into the main event and make sure youcare ready to go very short on the risk that has beeng gobbled up from the pigs at the trough.

It would be to the benefit of the EU and Greece to just let them default. Greece can't sustain it's debt even with the haircuts and their economy is not going to improve any time soon, the EU can't keep throwing money into that bottomless pit either. Time to let go and let nature take it's course already.

Was watching french television yesterday about how some people can not affored to heat their houses any more so they are cutting trees... I guess they should keep sticking up to Russia and see what it means to pay more for energy.

Your statement is correct. As global warming creates extreme weather patterns there will be more periods of sudden heat, cold, rainfall and draught. If you thought that global warming just gradually warms the planet than you have not been reading anything else than FOX headlines...

Christ, at this point lets get this done with, one way or the other. I would be interested to see what happens if Greece actually does default. I have a sneaky suppression that not a whole lot will happen. The French/Germans have been buying time to fortify their own banks against this. So let the Experiment begin...

13.11 CET Sarkozy has asked for the setting up of a central bank account for all Greek revenues that will be used to pay off Greek debt. The external control fantasy restated. It is a very close call for now. The end is the same, a different time frame, and each partuicupant races to protect its bit.

Incomprehensible. This logic makes Bangladesh one of the richest countries on earth. To have Demand it must be EFFECTIVE which means people have to have jobs and access to credit and banking systems. Just how defaulting on Debts gives access to buying more imported goods is not clear to Non-Americans. No doubt all those people living in tents in California and having homes foreclosed are simply looking to trade up to new homes in better neighbourhoods !

you are correct. well, the US is the current hegemon of this world. but this makes your "US citizen" comments not less cryptic, particularly for the majority of the US citizens themselves, who are quite oblivious to the US hegemony.

If you have a message, then adapt it for your audience. before you drive akak mad, possibly...

hey, if you are standing on the height of Chinese culture/history, then of course you take the long view, even after Chairman Mao gutted those cultural mountains to mere hills with his Cultural Revolution Nuclear Bombs, albeit somewhat higher than Europe's.

But here in ZH, you are writing mostly to the inhabitants of the Plains of Freedom. Living in the NOW and HERE.

The Euro is bullshit, it's not even a real currency, it is a derivative used to shift speculation from the currency exchange rate to the sovereign dedt rating of participating countries. It will go down in history as the greatest bankster scam ever pulled off.

Gold, silver and any sort of real asset that you can hold physically, carries intrinsic value AND hide from the government. They will pull all stops to save themselves, and they will go to extremes you only read about in history books. Everything else is part of the scam.

We need a guinea pig to see the effect of a sovereign default. Greece is a good candidate due to the small size. I doubt they will let the country default though. This is going to be another last minute decision like the US debt ceiling deal.

Think about endlessly nurturing a Greek state in which more than 80% of its population do -at least in part- not pay their taxes.

Tim Geither doesn't pay taxes and his gradfather was German

Jamie Dimon's family was Greek - does he pay taxes ?

“I love the retail broker business because my dad is a broker and my grandfather was a broker and it was the first job I ever had,” Jamie Dimon, 53, said at a Securities Industry and Financial Markets Association meeting Oct. 27.

AS I write this, Merkel is in France to talk to Sarkozy and their joint statement will be projected on French TV this evening.

I WOULD BE VERY SURPRISED THAT MERKOZY TAKE UP A JOINT POSITION THIS EVENING IN FRONT OF THE FRENCH NATION THAT WILL CONTRADICT THEIR FUTURE ACTIONS.

As we know the Greek government was given an ultimatum yesterday to define a common across board political position as reply to Troika demands. SO Merkozy know what Greek government will draw as their Rubicon in the final countdown to next week's deadline, which will condition if they get paid next installment from EU hand outs, and the outcome of Greece default (when and how).

So today is a critical phase on TV face to face with the people, not only on what Europe is doing for ESM firewall and fiscal convergence but also Greece!

On Greece : their joint statement just off the press is : We expect the Greeks to sign now. NO MORE CONCESSIONS POSSIBLE. ITS MAKE OR BREAK AND WE EXPECT THE GREEKS TO HONOUR THEIR COMMITMENTS.

If you read between the lines this means : A greek default is INEVITABLE if the Greeks tell the Troika "this is NOT doable"....

So Merkozy today have officially opened the door to the notion of default, saying : its their choice! As before, it was : We will do everything possible to make it impossible for Greece to leave Eurozone. This is now off the table.

Greece is now officially in denial. They claimed-- just before the EU-set deadline passed-- that there "was never any deadline".

They should have known better, because France and Germany immediately contradicted them. Not just some policy wonks, either: Sarkozy and Merkel themselves, at a joint press conference!

This is WORLD NEWS, but for some reason the American and Japanese media (I'm watching both) have no reporters covering the issue. Not a blackout, just pure disinterest in this incredibly important story. There's a fundamental disconnect at work between Europe and the rest of the world. Their financial clusterf--k is going to affect us all.

When Greece leaves the EU and Euro what we all need to watch is the economic recovery that takes hold in Greece. If this occurs as expected much like in Iceland you can figure many others such as Portugual, Spain, Ireland, and Italy will follow. This will be a game changer no matter how you look at it.

As far as the immediate impact. I'm not convinced that this will be as contained as the politicians would have you believe. Counter party risk is something no one calculates real well.

A broad assumption is that Greece will act as a type of Lehman collapse watershed moment. Quite differently it may act as was first assumend in the US that Lehmans failure would largely be a non event and that in fact a Greece defult may act as a symbolic firewall for the other piggys to tighten their belts or there bacon will soon too be in the fire. It seemed that the Greece foot dragging/can kicking gave hope to the others piggs that thay too would be able to take hostage the banks/insurance and they too could use Greece president to get better term post Greece bailout.

This is simply another Euro-Drama. Tensions build as numerous sources cite an imminent Greek Default. At the last minute a rumor will be released, saving the day. The Markets will rocket on this bullish rumor, perhaps 200-300 points on the dow. The world breathes a collective sigh of relief as the financial masters once again save the day.

Germany and France have finally drawn the line that a Greek defalt is better than the Moral Hazzard risks proposed by widdening the door for the other piggies plus others. Its about time the resolve of Germany, the banker of last resort showed their resolve...

"Because if Paulson was proven 100% wrong in under 5 days following the Lehman default, when the money markets broke and the Fed has to literally force a bailout of the global financial system, what can one say about two bit second tier politicians from Europe, who have never even seen a DCF model?"

@TD - this is an unfair comment. Comparing Paulson to Merkel, Sarkozy and Juncker is comparing apples to oranges. You need to compare Paulson to the finance ministers of Germany, France and Luxembourg i.e. Schauble, Baroin and some other dude/dudette.

In fact to be fair to at least Merkel - I think she's more likely to understand DCF models than Dubya ever was, even though Dubya had an MBA LOL!

However, I agree with your sentiment - Germany thinks they can firewall THEIR own banks and institutions, and let Greece go to the wall. When push comes to shove they're ultimately going to let the Eurozone burn.

Just like they refuse to pull their weight in Afghanistan, leaving the US, UK and Canada to do the heavy lifting. Or in NATO as a whole:

The Myth of Germany wanting to create a new Europe, wanting to keep the Eurozone together at all costs was always just that: A Myth ! That Myth was spun by the US and UK and the Murdoch Mainstream Media, to further their goals of a new world order, with a clean sweep in the middle east with total control of Oil and other Resources secured via Israel.

It is a strategic game by US and UK interests and if you study the geographic details on the map of the world, you will realize the name of the game.

A Greek Default would expose the big bailout scam, that is doomed to failure, for what it really is: a scam, not only in Europe, but even more so in the UK and also in the US.

Because if the PIIGS Bailout fails, all other bail-outs will be exposed as a scam, and it will be a Lehman, Bear Sterns and AIG freak time all over again...

Germans just could'nt care less if Greece defaults -

and that is why Angela Merkel is so cool and composed, that's why her popularity is at an all time high in Germany.

Germans so far have not given in to the free bailout shit, that financial fraud scam Tim Geitner and David Cameron

have been trying to peddle and serve up in Europe, after it failed so miserably in the US and the UK !

The only ones worried about a Greek Default are the US and the UK -

because they will lose billions, and Goldman Sachs must be getting hot by now with all those Greek CDS contracts !

It sounds as if somebody is becoming practical and has decided to go with the lesser of all evils and the cheapest-to-deliver Greece.

Giving Greece more money just adds to what already will never be repaid and merely postpones the inevitable default. Voluntary haircuts surely would need another "touch up" in the not so distant future, and it would destroy the CDS market and add to everyone's cost of borrowing. Retroactive CACs (on bonds issued under local Greek Law) are an additional dangerous precedent. Default, but within the euro, is the best of a bad set of choices. Greece can keep what few euros its banks still have, and with their debt evaporated, they will have to sit in the penalty box for probably no more than three months before some banker decides to take a risk, NPV the loan's profit, get a bonus, and leave the clean-up to the next guy. Default outside of the euro triggers bank runs in Portugal for sure, most probably Spain, and perhaps Italy. Can't have that. The danger is that default rips the bathing trunks off of some long premium CDS player.

All of what will hit the fan with a within-the-euro default is going to hit the fan regardless. Practicality says take the pain at the least cost, though it took two years for Germany to become practical.

Wake up Greece. Declare a 100% sovereign debt default. That will put your economy on a sound footing. Yes, you'd have to give up on debt financing... but that's part of becoming a solid, stable economy. Yes, you'd have to cut back government workers, cut their salaries and cut their benefits... but that's part of becoming a solid, stable economy. And yes, you should swear off all fractional reserve practices and adopt grams of physical gold (coins) as lawful money. Do all that and your economy will become prosperous in a mere year or two.

...the barbarians, who forced beautiful Europe to get down Zeus’“back” and made her a prostitute ...the unworthy Europeans, who in 1945 “took Europe down” from “Mount Olympus” and in 2012 relinquished “enslaved” Europe to the Phoenician loan sharks.

Germans are proved to be the easy solution to breach Europe’s door. Whoever wishes to “set foot” on Europe and demolish it, the only thing he has to do is to “fool” the Germans. For a second time in less than fifty years, Europe’s idiots become the victims of foreigners and they serve their interests at the expense of Europe...

The German traitors of Europe along with the Phoenicians from Asia may have forced Europe to get down from the "back” of the Greek “bull”, but it remains to be seen how they shall pull it through with the “bull”.